How is the R2 value calculated, and what information does this ...

[joblessjake]

How is the R2 value calculated, and what information does this give you?
 
  What will be an ideal response?

Question 2

In terms of cost-benefit analysis, explain why a competitive market with an externality produces too much pollution.
 
  What will be an ideal response?

[vkodali]

Answer to Question 1

R2 = RSS/TSS = 1 - (ESS/TSS), where TSS = sum of squared deviations of the sample values of Y from their mean, RSS = sum of squared deviations of the estimated values from their mean, and ESS = sum of the squared deviations of the sample values from their estimated values. The R2 value tells you what percentage of the variation in the dependent variable is explained by variation in the independent variables, or the goodness of fit of the equation. In this case, 65 of the variation in quantity demanded is explained by variation in the independent variables.

Answer to Question 2

At the socially optimal level of production, welfare is maximized and the marginal benefit from less pollution equals the marginal cost of less output. However, a competitive market with an externality produces more pollution than is socially optimal, and the marginal cost of less output is greater than the marginal benefit from less pollution.